Canada has experienced tremendous success selling labor on opportunity. It’s not having nearly as much luck convincing investors of the same. That was the take from BMO Capital Markets, warning the TSX saw a record sell off from foreign investors. The institution warns this is just part of a larger issue of domestic and global capital seeing fewer opportunities in the country, and sending their money to work elsewhere.
Canada’s Stock Markets Underperform, Failing To Attract Investors
Canada’s largest stock market has noticeably lagged—especially when compared to the US. BMO’s research shows the TSX climbed just 8.1% in 2023 compared to the S&P 500’s 24.2% over the same period. Some of this can be attributed to retracing the lost ground from 2022, but not all of it. Significant selling was observed and it wasn’t exactly clear why.
Source: BMO Capital Markets; Statistics Canada.
“… the TSX also lagged many of its peers and even the Dow. And that underperformance has dragged into the opening weeks of 2024,” explains Douglas Porter, Chief Economist at BMO.
Adding, “And now we have a big clue as to who is doing the selling.”
Canada Has Never Seen Such A Large Foreign Investor Sell Off
Canada is typically seen as a safe haven for investors but some of that sheen has begun to tarnish. Foreign investors sold a net of $48.7 billion worth of Canadian equities in 2023. That number doesn’t just sound astronomical, it would have been unimaginable in 2019. It’s the largest annual outflow on record ever for Canada.
“Over the past three decades, a “normal” year would see net buying of about $12 billion—an inflow of about $1 billion a month, not the net outflow of $4 billion per month seen in 2023,” says Porter, emphasizing how unusual this trend is.
Weak Foreign Investment Has Been Weakening The Loonie
The heavy selling by foreign investors explains the issue but it’s hardly surprising. This is part of a larger trend of investors abroad pulling back on capital invested in the country. Foreign Direct Investment (FDI) being another glaring red flag.
“Combined with a steady net outflow in FDI, this helps explain why the Canadian dollar has struggled over the past year. Indeed, the surprise is that it didn’t suffer an even bigger setback,” he says.
Annual data isn’t available for Canadian FDI yet, but the past year wasn’t pretty. Canadians sent nearly $9 billion more abroad than foreign investors sent to Canada in Q3 alone. It’s generally not a great sign when domestic investors see more opportunities abroad than foreign investors see in a country.
Can anyone blame foreign investors? Outside of real estate investment, it doesn’t appear the country is interested in anything else. Housing has been swallowing the country’s investment, diverting capital from industry and directing it to housing. Even the country’s largest bank has warned the concentration will have a destabilizing effect on the economy.
